Finance

Balance sheet
 Records what the business owns (assets) and owes (liabilities) at a specific time.
 Contains three parts: assets, liabilities, and equity
 Also called statement of financial position.

Non-current asset (fixed assets)

 Any asset used for business operations (rather than for selling) and is likely to last for
more than 12 months from the balance sheet date, such as premises, machinery and
equipment.
 Some fixed assets lose its value overtime. This has to be reflected in the Fixed Asset
section by using an account named ACCUMULATED DEPRECIATION.
Example:
Vehicle 5000
Less: Accumulated Depreciation (200)
Net Fixed Asset 4800

Current Asset
 Refers to cash or any other liquid asset that is likely to be turned into cash within twelve
months of the balance sheet date. The three main types of current assets are cash, debtors
and stocks.
 Debtors: People or other organizations that owe money to the business as they have
purchased goods on credit.
 Stocks: Unsold supplies of raw materials, semi-finished goods (work in progress) and
finished goods.

Current Liabilities (short term)

 Current liabilities are debts that must be settled within one year of the balance sheet date,
e.g. taxes owed to the government, trade creditors and bank overdrafts.
 Trade creditors: suppliers need to be repaid for items that have been purchased on trade
credit, within 30-60 days.

Non-current liabilities (long term)

 Long-term liabilities are debts that are due to be repaid after twelve months, i.e. they are
sources of long-term borrowing. Examples include debentures, mortgages (type of loan
used to purchase real estate), and bank loans.

Equity
 Shows the value of the business belonging to the owners
 Share capital: amount of money raised through the sale of shares. It shows the value
raised when the shares were first sold, rather than their current market value.
 Retained profit: amount of net profit after interest, tax and dividends have been paid. It is
then reinvested in the business for its own use. This money, of course, belongs to its owners
 so appears under owners' equity or shareholders' equity. The figure for retained profits
comes from the firm's P&L account.
 Net Assets = Total Assets - Total Liabilities

Budget and variance analysis

 Cost center: Department or unit of a business that incurs costs but is not involved in earning
any profit. (ex: accounting, HR, and IT department)
 Profit center: Department or unit of a business that incurs both costs and revenues by
selling goods/services to customers. (Ex: Individual restaurants in a large restaurant chain,
manufacturing divisions in a large corporations, individual retail stores in a large retail chain)
 Budget: Financial plan of expected revenue and expenditure for an organization or a
department within an organization. Budgets are needed when a business grows beyond a
certain size which prevents the owner or controller from making all expenditure decisions.

 Budgetary control: use of corrective measures taken to ensure that actual outcomes equal
the budgeted outcomes by systematic monitoring of budgets and investigating the reasons
for any variances.
 Variances: The difference between the budgeted figure and the actual outcome. Budgetary
control requires managers to investigate the causes of any variance.
 Variance = Actual outcome - Budgeted outcome

Types of variance:
 Favourable variance: When the discrepancies are financially beneficial to the organization.
(Ex: actual cost less than budgeted cost, actual sales more than budgeted sales)
 Adverse variance: When the discrepancies are financially detrimental to the organization.
(Ex: overspending)
o Tips: There is a favourable variance of $500, or there is an adverse variance of $500
 Variance analysis: The management process of comparing planned and actual costs and
revenues in order to measure and compare the degree of budgetary success.

Importance of budgets and variances:

1. Planning and guidance: Require managers to plan for the future and to anticipate financial
problems before they occur. Thus, businesses are better prepared to overcome problems
should they arise.
2. Coordination: Enables managers to control the organization’s money. Effective budgeting
requires managers to match budget allocations with the aims of the organization. Without
proper budgetary control, budget holders might make decisions that conflict with those made
in other departments (ex: marketing department might budget sales revenue beyond the
organization’s productive capacity)
3. Control: Help control business expenditures and prevent overspending. Without budgeting
and variance analysis, managers are not held accountable for their actions and
expenditures.
4. Motivational: Delegation of budgetary control to budget holders can boost their level of
morale as they feel valued and trusted. Can also lead to performance management and staff
appraisals to recognize and reward those who achieve their performance targets.
Limitations of budgets and variances
1. Unforeseen changes can cause large differences between budgeted and actual figures. This
can make some budgets unrealistic and targets unachievable.
2. Overestimating budgets makes it easier for managers to meet their targets. However, this
can cause complacency and excessive spending.
3. Budgets can be set by senior managers with no direct involvement in the running of the
department, thus this can cause resentment and discontent as senior managers might not
fully understand the needs of the department.
4. Less useful for businesses with seasonal fluctuations in demand and where costs are harder
to predict. Especially for businesses that source their materials from overseas (due to
fluctuations in exchange rates)
5. Rigid and poorly allocated budgets can harm quality. Lower production budget → use of
substandard raw materials and components.
6. Time-consuming
7. Conflict in the workplace and perceptions of inequity. Limited finances → one department’s
gain is another’s loss → budget holders compete to increase their own budgets at the
expense of other budget holders.
8. Inflexible in today’s fast-paced and constantly changing business environment.
 Growth and evolution
Economies of scale
 Lower average cost of production as a firm operates on a larger scale due to an
improvement in its productive efficiency.
 This is because the total fixed cost remains constant but is spread over an increasing
amount of output.
 Lower average cost → lower prices being charged to customers and a higher profit margin
→ competitive cost advantage
 Average cost: cost per unit of output. Average Cost = Total Cost/Quantity

Internal
Cost-saving advantages that arise as a result of the growth of the firm. Occurs inside the firm
and is within its control.
 Technical: Cost savings by greater use of large-scale machinery (e.g. mass production
techniques). Ex: use of machines → more outputs → high efficiency → lower cost per unit

 Marketing: If a business doubles its sales, it doesn’t have to double its marketing expenses.
MNCs spread the high costs of advertising by using the same marketing campaign across
the world, promoting their brand rather than every single product from their product portfolio.

 Financial: Banks and other lenders charge lower interest to larger business for overdrafts,
loans and mortgages because they represent lower risk. Ex: Large sum of borrowed money
→ privilege of lower interest rate → lowers the cost per unit.

 Managerial: Larger businesses can afford to hire specialist functional managers, thus
improving the organization’s efficiency and productivity. Presence of specialists → jobs done
at a faster rate (efficiency)/less mistakes/avoids duplication of tasks → lowers cost per unit.

 Risk bearing: Large businesses (conglomerates) can bear greater risks than smaller ones
due to a greater product portfolio. Unfavourable trading conditions for a certain product can
be covered by more favourable conditions in other sectors.

 Purchasing: Large firms can negotiate favourable prices as a result of buying in bulk. Bulk
buying → more discounts → lower cost per unit.

External
Cost-saving benefits as a result of the growth of the industry — beyond an individual firm’s
control.
 Local knowledge and skills, supply of skilled labour → no need to train workers
 Better infrastructures and facilities, more time-saving
 Technological processes

External growth strategies

Merger and acquisition
1. Integration
 Horizontal integration: integration between companies operating within the same industry
(i.e. they are rivals)
 Vertical integration: integration between companies operating in different stages of the
production process.
 Forward: retailer (e.g. indomaret); Backward: supplier
 Conglomerate: when businesses in unrelated industries engage in a merger/takeover

2. Acquisition
Also called takeover, when one company buys a controlling interest (majority stake) in
another company -> enough shares are bought so that the buyer owns more shares than
any other shareholder, changing the ownership.
3. Merger
Two companies agreeing to form a single, larger company thereby benefiting from operating
on a larger scale.

Benefits:
 Revenue may increase with the elimination of redundant costs (EOS)
 Potential market share increases, either across geographic borders or through loyal
consumers willing to look at new products developed as a result of the merger or
acquisition.
 Reduced competition can increase profit margins and spur innovation.
 The companies gain access to new resources and human capital previously held by their
competitor.
 Brand visibility may increase.
 Stock prices may rise as a result of the combined assets and reduced costs.
 Incremental growth may come more easily as a result of the above benefits.

Drawbacks:
 Redundancies
 Conflict
 Culture clash
 Lack of control
 DOS (government regulations hindering the success of M&A)
 Irreversible process

Effects:
 The larger the potential target, the bigger the risk to the acquirer. A company may be able to
withstand the failure of a small-sized acquisition, but the failure of a huge purchase may
severely jeopardize its long-term success.
 Once an M&A transaction has closed, the acquirer’s capital structure will change, depending
on how the M&A deal was designed. An all-cash deal will substantially deplete the acquirer’s
cash holdings. But as many companies seldom have the cash hoard available to make full
payment for a target firm outright, all-cash deals are often financed through debt. While this
 increases a company’s indebtedness, the higher debt load may be justified by the additional
cash flows contributed by the target firm.
 Stock and investors: The target company’s stock price usually rises due to the deal; an
acquiring company pays a premium on the target shares to win the appreciation of the target
company’s shareholders. Thus, with the premium paid, the selling company stocks get
higher and can attract more potential investors.
 Employees: Employees from the two organizations may compete instead of working
together. Employee morale may suffer as a result of merging two corporate cultures.
Employee motivation may drop as frustration with new roles and new co-workers or
management increases.

Joint ventures
 Two or more firms combine equity to form a new third entity
 Very detailed agreements covering what each party is to provide, expect, and how each is to
operate in the joint venture
 Level of equity varies, amount contributed by each party might not be equal
 Not permanent
 At the end of the JV:
o JV is dissolved (discontinued)
o One of the parent companies buys out JV
o JV project is extended

Advantages:
 Can be dissolved
 Financial risks are split between parent companies
 Cheaper and quicker than M&As which involve high legal and administrative costs
 Parent companies can enjoy benefits of growth without losing individual corporate identities
 Presence of synergy

Disadvantages:
 Possible conflicts and disagreements between parent companies
 Parent companies have to share profit

Strategic alliance
 Formal relationship between two or more companies in pursuit of common goal in their
business even while remaining as independent organizations
 For SA to work, information sharing and genuine willingness to support other companies are
vital
 Commitment to a common goal, the exchange of knowledge, and joint company events
 Built on trust and a true desire to grow together

Impacts of JV and SA:

 Synergy
 Improving short-term finances. Companies wanting to make immediate financial impacts
may find it easiest to leverage another company's resources to improve its short-term
position in the market.
 Eliminating barriers to entry. Companies may not have the capital on hand to enter
certain markets. Instead, they can use companies that have already made those
investments to gain access cheaper and faster.
 Sharing financial risk. Should a business venture fail, both parties in a strategic alliance
are likely to contribute to paying for those losses. Instead of single-handedly being
responsible for the failure, both parties may receive assistance from the other as part of the
alliance agreement.
 Innovating beyond current capabilities. In the Panasonic/Tesla alliance mentioned
above, that partnership created a cutting-edge, innovative agreement that put some of the
smartest experts for electric vehicles batteries on the same team.
 Competitive advantage
 Greater flexibility with strategic alliance than a joint venture because membership (of the
alliance) can change without having to terminate the coalition

Disadvantages:
 Organizational culture
 Lack of control
 Leadership gaps

Shamrock organization
Charles Handy recommends that businesses ought to place greater emphasis on meeting the
needs of workers through methods such as job enrichment (giving workers more interesting
and challenging tasks) and flexible working practices.

Core workers (professional core):

Full-time and multi-skilled professional workers who handle the daily operations of the business.
Crucial to the organization’s operations, survival and growth. Ex: senior management
 (+) Commitment and loyalty, very motivated and high productivity
 (-) Higher costs and limited flexibility (can’t work outside of the defined working hours and
tasks)

Flexible workers (peripheral workers):

Part-time, temporary and portfolio workers who are employed as and when they are needed on
a flexible basis.
 (+) Cost savings: Hiring peripheral workers can be cost-effective, as they may be paid hourly
or on a project basis, avoiding long-term employment costs.
 (+) Boosts overall morale and engagement within the workplace. Better work-life balance →
more productive employees.
 (-) Lower productivity: Due to their temporary nature and lack of deep familiarity with the
organization, peripheral workers may require additional time to get up to speed, potentially
leading to lower initial productivity levels.
Outsourced workers:
Individuals or businesses that are not employed by the organization but are paid to complete
particular and specialized tasks. Ex: freelance workers, subcontractors, agencies, consultants,
and the self-employed.
 (+) When you outsource, you can pay your help as a contractor. This allows you to avoid
bringing an employee into the company, which saves you money on everything from
benefits to training. Ex. No training cost: The work will be handed over to people who are
already experts in the trade. This will bring in efficiency and quality in the work.
 (-) Less loyalty or commitment to the organization compared to core workers, as their
primary focus is often on completing the assigned tasks or projects. Integrating contractual
workers into the existing team or organization can be challenging.
 Internal and external factors
What is Work Force Planning/HR Management
Analyzing an organization's current and future workforce needs and developing strategies to
meet those needs. It involves determining the number and types of employees required, as
well as the skills, knowledge, and abilities they need to possess.

Internal factors
1. Size: The larger the firm, the more involved it needs to be in HR planning (e.g. training,
appraisals, etc.
2. Strategic direction: What is the priority of the business? If it’s growth, then they need to plan
on recruiting more workers and promote existing employees to senior positions.
3. Finances: HR planning needs data on sufficient funding available. Growth → More revenue
→ Fund to hire more workers. Training also requires money.
4. Motivation: Higher motivation → More productive workers → Lower labour turnover rate.
5. Corporate culture: Culture of the organization affects how the HR department operates. This
influences its approach to HR matters such as working hours, flexitime, teamworking,
appraisals, job sharing, training, dismissal and redundancies, outsourcing, and the internal
promotion of staff.

External factor
Demographic change:
Variations in the structure of the population.
o Average age: Workforce getting older → labor shortages in certain industries and increased
demand for certain types of jobs (healthcare and elder care). Must take into account the
potential impact of an aging workforce, such as retraining or hiring new employees, and
accommodating the needs of older workers.
o Ethnicity and gender distribution: Must take into account the unique needs and challenges
faced by different groups of workers and develop strategies to support diversity and
inclusion in the workplace.
o Education level: HR must take into account the education and training required for each
position and develop strategies to attract and recruit workers with the necessary
qualifications.
o Average household income:
 Commuting: Workers with lower household incomes need extra finances for
commuting.
 Cost of living: HR must take into account the cost of living in the region and develop
strategies to ensure that workers can afford to live and work in the area.
 Turnover rate: Workers with lower household incomes may face additional financial
stress more likely to leave the organization for higher-paying opportunities.
Workforce planning must take into account the needs of different groups of workers
and develop strategies to support their engagement and retention.
o Official retirement age in the country: HR must retain and hire new employees and
accommodate the needs of older workers.
Change in labour mobility:
The extent to which workers have the ability and willingness to move between geographical
locations and/or occupations for their employment. Increase in labour mobility → increase
effectiveness in HR
a. Occupational mobility: Ability & willingness of employees to do another job or pursue a
different career. Employees have necessary qualifications, experience, and skills to move to
another job → higher occupational mobility. Occurs due to rules and regulations
(educational requirements & training).
 (+) Increase the pool of potential workers for a particular job or industry. Workers
with skills and experience in related occupations or industries can be a valuable
source of talent for organizations.
 (-) Lowers wage: If it is easier for laborers to enter a particular industry, the supply
of labor will increase for a given demand, which lowers the wage rate
 Can be restricted through regulations. Licensing, training, or education
requirements prevent the free flow of labor from one industry to another.

b. Geographical mobility: ability and willingness of employees to relocate to another location or

country for work reasons. Ex: pilots have to travel long distances for work. Geographical
immobility → unwillingness of workers to move to another area (reasons: family ties,
relocation costs, lower wages and salaries, etc.)
 (+) Diversity and inclusion: Workers from different regions may have different
cultural backgrounds, perspectives, and experiences that can be valuable for
organizations.
 (can be + can be -) Cost of living: Workers who are willing to relocate may be
attracted to regions with lower costs of living. Workforce planning must take into
account the cost of living in the region and develop strategies to ensure that
workers can afford to live and work in the area.
 (-) Brain drain: Labor mobility is associated with the dissolution of local communities
and extinction of indigenous cultures as members migrate to seek economic
opportunities and resettle in areas in which they are culturally alien.

New communication technologies:

Cheaper and easier for large organizations to carry out human resource planning. Ex: Websites
used to attract potential workers, video conferencing software for recruiting workers,
headhunters using LinkedIn to find candidates for senior positions, WFH, online training courses
and webinars.

Government legislations:
HR planning needs to consider the employment legislation of the country. Ex: equal
opportunities, minimum wage legislation, and the storage of employee data and personal
records.

Immigration:
Migrant workers move to other locations/countries for job opportunities.
o (+) Talent acquisition: Immigration can provide organizations with access to a wider pool of
talented and skilled workers. This can help organizations to fill key positions and meet their
workforce needs more effectively.
o (+) Workforce diversity: A diverse workforce can bring a range of perspectives and ideas to
the workplace, which can improve innovation and problem-solving. Additionally, a diverse
workforce can help organizations to better serve diverse customer bases.
o (-) Legal compliance
o (-) Cultural integration: Workers need to feel valued and integrated into the organization. HR
planning must identify the unique needs and challenges faced by immigrant workers, and
develop strategies to support their integration into the organization.

5. Gig economy:
Labour market in which temporary, flexible jobs are common and organizations contract with
independent workers for short-term engagements or projects.
o (+) Cost savings: More cost-effective compared to hiring full-time employees. Businesses
often avoid paying for benefits (e.g. healthcare, retirement plans, and paid time off)
o (-) Potential for intellectual property and data risks: Businesses may need to share sensitive
information, intellectual property, or customer data. Gig workers may not have the same
level of commitment to data security and confidentiality as full-time employees.

Leadership style
Process of influencing and inspiring other people to achieve a vision or goal. Leaders foster
motivation, respect, trust and loyalty from workforce.

Autocratic:
Leader makes all decisions. Gives little information to staff. Supervises workers closely. Only
one-way communication.
1. Suitability:
o Employees are unskilled, inexperienced, lack initiative and/or need to be told specifically
what to do.
o In times of crisis when decisive action might be needed to limit damage to the business
or danger to others
2. Benefits:
o Ensures leader has complete control of operations
o Speeds up decision-making process
o Provides workers with clear sense of direction and clarity over their roles
3. Limitations:
o Creativity and innovation are suppressed and discouraged.
o Does not develop internal talents of the workforce
o Demotivates employees as their opinions are not valued

Paternalistic:
Consultation may occur, but leader makes the decisions, guiding and protecting the team.
Similar to parent/child relationship, where the leader is the father figure. A softer from of
authoritarian leadership.
4. Suitability:
o Family-run businesses
o Employees or followers require a high level of support and guidance.
o May be more suitable in certain cultural contexts where hierarchical relationships and
respect for authority are highly valued.
5. Benefits:
o Motivated staff → feel guided and that their interests are protected
o Harmonious relationship → leader genuinely values the staff
o Sense of belonging, help meet workers’ safety and social needs
6. Limitations:
o Centralized decision-making → workers’ views are ignored
o Communication is top-down → not applicable for flatter structure
o Leader might not always make the best decision → conflict and disagreement

Democratic:
Willing to delegate authority and consult subordinates in decision-making. Participation is
encouraged. Two-way communication used, allows feedback from staff. Workers given
information about the business to allow full staff involvement.
7. Suitability:
o Used in businesses that expect workers to contribute fully to the production and
decision-making processes, thereby satisfying their high-order needs (social needs,
esteem needs, and self-actualization needs).
o When the workforce is experienced and flexible
o In situations that demand a new way of thinking or a new solution, staff input can be
valuable.
8. Benefits:
o Workers feel valued and motivated
o The most is made out of the skills, experiences, and creativity of employees
o Collaboration → high morale and improved productivity
o Regular feedbacks from employees
9. Limitations:
o Consultation with staff can be time consuming, may result in disagreements
o Some issues might be too sensitive to be delegated to staff (e.g. job losses) or too
secret (e.g. development of new products)

Laissez Faire:
Managers delegate significant amount of authority and decision-making powers. Leaders give
the autonomy/freedom to workers to carry out tasks in their own way, with minimal direction or
supervision.
10. Suitability:
 o Managers are too busy to intervene
o In research institutions where experts are more likely to arrive at solutions when not
constrained by narrow rules/management controls
11. Benefits:
o Freedom → Motivate employees
o Encourage individuals to be creative→ more innovative firm
o Intrapreneurial culture
12. Limitations:
o Slack (complacency) can arise due to a very minimal level of supervision involved
o Unsuitable for some workers

Situational:
Leader who can change leadership style according to the circumstances being faced. Involves
leader/manager adjusting their leadership style to fit the task, circumstance or situation that they
find themselves in.
13. Suitability:
o Dynamic environments where tasks, goals, and challenges change frequently.
14. Benefits:
o Flexibility/adaptability in leadership which allows a better response in a dynamic nature
of business.
o Harmonious relationship between leaders and workers
15. Limitations:
o Workers may become disheartened/disturbed if leader changes their leadership style
o Most people have a preferred or natural leadership style, so changing/adopting a
different style may become difficult for them.
o